China is facing an economic downturn reminiscent of Japan’s struggles in the 90s. Actually, I take that back…China’s outlook is much worse.
The core of China’s problem is declining demographics. This crushes demand and leaves industrial production as the only path forward. Issuing debt and spending more on real estate, bailing out local governments and boosting industrial capacity isn’t going to do much, in fact, it will lead to deflation…a particularly nasty economic phenomenon which occurs when oversupply drives prices down into a reinforcing spiral of dysfunction involving recession, industrial busts, mass unemployment and general mehness.
If the Chinese want to avoid deflation, they’ll need to cut industrial capacity, but that’s not risk-free either. And to round out China’s list of issues, Chairman Xi’s chokehold on Chinese power adds another layer of complexity to successfully navigating this economic headwind.
